Second Quarter Earnings Call - L3 Technologies · 2018. 6. 27. · 2Q12 Earnings Call | July 26,...

2Q12 Earnings Call | July 26, 2012 1

Second Quarter Earnings Call July 26, 2012

This presentation consists of L-3 general capabilities and administrative information that does not contain controlled technical data

as defined within the International Traffic in Arms (ITAR) Part 120.10 or Export Administration Regulations (EAR) Part 734.7-11.


Forward Looking Statements

Certain of the matters discussed in these slides, including information regarding the company’s 2012 financial outlook that are predictive in nature, that depend upon or refer to events or conditions or that include words such as ‘‘expects,’’ ‘‘anticipates,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘believes,’’ ‘‘estimates,’’ and similar expressions constitute forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of total sales growth, sales growth from business acquisitions, organic sales growth, consolidated operating margins, total segment operating margins, interest expense, earnings, cash flow, research and development costs, working capital, capital expenditures and other projections, they are subject to several risks and uncertainties, and therefore, we can give no assurance that these statements will be achieved. Such statements will also be influenced by factors which include, among other things: our ability to achieve anticipated benefits from the spin-off of Engility; our dependence on the defense industry and the business risks peculiar to that industry, including changing priorities or reductions in the U.S. Government defense budget; backlog processing and program slips resulting from delayed funding of the Department of Defense (DoD) budget; our reliance on contracts with a limited number of agencies of, or contractors to, the U.S. Government and the possibility of termination of government contracts by unilateral government action or for failure to perform; the extensive legal and regulatory requirements surrounding our contracts with the U.S. or foreign governments and the results of any investigation of our contracts undertaken by the U.S. or foreign governments; our ability to retain our existing business and related contracts (revenue arrangements); our ability to successfully compete for and win new business and related contracts (revenue arrangements) and to win re-competitions of our existing contracts; our ability to identify and acquire additional businesses in the future with terms that are attractive to L-3 and to integrate acquired business operations; the impact of any strategic initiatives undertaken by us, and our ability to achieve anticipated benefits; our ability to maintain and improve our consolidated operating margin and total segment operating margin in future periods; our ability to obtain future government contracts (revenue arrangements) on a timely basis; the availability of government funding or cost-cutting initiatives and changes in customer requirements for our products and services; our significant amount of debt and the restrictions contained in our debt agreements; our ability to continue to retain and train our existing employees and to recruit and hire new qualified and skilled employees as well as our ability to retain and hire employees with U.S. Government security clearances; actual future interest rates, volatility and other assumptions used in the determination of pension benefits and equity based compensation, as well as the market performance of benefit plan assets; our collective bargaining agreements, our ability to successfully negotiate contracts with labor unions and our ability to favorably resolve labor disputes should they arise; the business, economic and political conditions in the markets in which we operate, including those for the commercial aviation, shipbuilding and communications markets; global economic uncertainty; the DoD’s contractor support services in-sourcing and efficiency initiatives; events beyond our control such as acts of terrorism; our ability to perform contracts (revenue arrangements) on schedule; our international operations; our extensive use of fixed-price type contracts as compared to cost-plus type and time-and-material type contracts; the rapid change of technology and high level of competition in the defense industry and the commercial industries in which our businesses participate; our introduction of new products into commercial markets or our investments in civil and commercial products or companies; the outcome of litigation matters, including in connection with jury trials; results of audits by U.S. Government agencies; results of on-going governmental investigations, including potential suspensions or debarments; the impact on our business of improper conduct by our employees, agents or business partners; anticipated cost savings from business acquisitions not fully realized or realized within the expected time frame; the outcome of matters relating to the Foreign Corrupt Practices Act (FCPA) and similar non-U.S. regulations; ultimate resolution of contingent matters, claims and investigations relating to acquired businesses, and the impact on the final purchase price allocations; competitive pressure among companies in our industry; and the fair values of our assets, which can be impaired or reduced by other factors, some of which are discussed above. For a discussion of these and other risks and uncertainties that could impair our results of operations or financial condition, see ‘‘Part I — Item 1A — Risk Factors’’ and Note 19 to our audited consolidated financial statements, included in our Annual Report on Form 10-K for the year ended December 31, 2011, and any material updates to these factors contained in any of our future filings. Our forward-looking statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements. As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainties of estimates, forecasts and projections and may be better or worse than projected and such differences could be material. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of these slides to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events.


Second Quarter Results


Select Financial Data - Second Quarter ($ in Millions, except per share amounts)

2Q12 2Q11 vs. 2Q11

Sales $3,558 $3,766 -6%

Segment Operating Margin 10.5% 10.7% -20 bps

Segment Operating Income $374 $404 -7%

Net Interest Expense and Other Income $49 $51 -4%

Tax Rate 34.6% 30.3% +430 bps

Diluted Shares 98.5 107.2 -8%

Diluted Earnings Per Share $2.08 $2.26 -8%

Net Cash from Operating Activities $271 $299 -9%

Free Cash Flow $223 $256 -13%

Notes: (1) 2Q12 and 2Q11 financial data include the results of Engility.

(2) The 2Q12 higher tax rate is due to the 2011 reversal of previously accrued amounts of $12M, or $0.11 per share, primarily related to

the 2006 and 2007 U.S. Federal income tax returns and the expiration of the U.S. Federal research and experimentation tax credit.

(3) 2Q12 segment operating margin and income exclude $7M ($5M after tax or $0.05 per share) of spin-off transaction expenses.

(4) See Reconciliation of GAAP to Non-GAAP Measurements.


Segment Results - Second Quarter

($ in Millions)

Sales 2Q12 Margin2Q12 Growth Operating Change

Segment Sales vs. 2Q11 Margin vs. 2Q11

(bps)

C3ISR 862$ 4% 10.1% -130

Electronic Systems 1,352 -3% 12.8% -40

AM&M 591 -3% 8.8% -40

Gov't Services 753 -20% 8.2% +70

Consolidated 3,558$ -6% 10.5% -20

Notes: (1) During 1Q12, the company re-aligned the management and organizational structure of a business unit, and made related

reclassifications between its C3ISR and Electronic Systems segments. See Supplemental Segment Data slide for the previous

and revised 2Q11 segment data presentation.

(2) 2Q12 operating margin excludes $7M of spin-off transaction expenses.

(3) Government Services segment results include the Engility business spun-off on July 17, 2012. L-3 will report Engility as

discontinued operations beginning with 3Q12.


First Half Results


Select Financial Data - First Half

($ in Millions, except per share amounts) 1H12 1H11 1H12Actual Actual vs. 1H11

Sales $7,146 $7,367 -3%

Segment Operating Margin 10.3% 10.8% -50 bpts

Segment Operating Income $737 $794 -7%

Net Interest Expense and Other Income $97 $112 -13%

Debt Retirement Charge $0 $18 n.m.

Tax Rate 34.4% 31.8% +260 bpts

Diluted Shares 99.4 108.4 -8%

Diluted Earnings Per Share (EPS) $4.08 $4.11 -1%

Net Cash from Operating Activities $408 $519 -21%

Free Cash Flow $333 $442 -25%

Notes: (1) 1H12 and 1H11 financial data include the results of Engility.

(2) The 1H12 higher tax rate is due to the 2011 reversal of previously accrued amounts of $12M, or $0.11 per share, primarily related to

the 2006 and 2007 U.S. Federal income tax returns and the expiration of the U.S. Federal research and experimentation tax credit.

(3) 1H12 segment operating margin and income exclude $13M ($9M after tax or $0.09 per share) of spin-off transaction expenses.

(4) 1H11 includes a debt retirement charge of $18M ($11M after tax, or $0.10 per share).

(5) See Reconciliation of GAAP to Non-GAAP Measurements.


Segment Results - First Half

($ in Millions)

Sales 1H12 Margin1H12 Growth Operating Change

Segment Sales vs. 1H11 Margin vs. 1H11

(bps)

C3ISR 1,748$ 10% 10.3% -140

Electronic Systems 2,665 -1% 12.2% -60

AM&M 1,205 - 9.6% -50

Gov't Services 1,528 -19% 7.5% -

Consolidated 7,146$ -3% 10.3% -50

Notes: (1) During 1Q12, the company re-aligned the management and organizational structure of a business unit, and made related

reclassifications between its C3ISR and Electronic Systems segments. See Supplemental Segment Data slide for the previous

and revised 1H11 segment data presentation.

(2) 1H12 operating margin excludes $13M of spin-off transaction expenses.

(3) Government Services segment results include the Engility business spun-off on July 17, 2012. L-3 will report Engility as

discontinued operations beginning with 3Q12.


2012 Financial Guidance


2012 Consolidated Financial Guidance

CurrentGuidance 2011 Midpoint

Excluding Engility Excluding Guidance(Jul. 26, 2012) Engility vs. 2011

Net Sales $12,950 to $13,150 $13,158 -0.8%

Operating Margin 10.3% 11.0% -70 bps

Interest Expense/Other $177 $191 -7%

Debt Retirement Charge $8 $34 -$26

Tax Rate 34.4% 31.3% +310 bps

Diluted EPS $7.70 to $7.85 $7.82 -0.6%

Net Cash from Operating Activities $1,240 $1,282 -3%

Less: CapEx, net of Dispositions $(195) $(181) 8%

Free Cash Flow $1,045 $1,101 -5%

($ in Millions, except per share amounts)

Notes: (1) L-3 completed the spin-off of the Engility business on July 17, 2012. The Current Guidance excludes the Engility business and $19M of estimated spin-

off transaction expenses that will be reported in discontinued operations beginning with L-3's 2012 third quarter.

(2) Current Guidance is unchanged from the guidance provided June 26, 2012 for L-3 (excluding Engility).

(3) The 2012 Current Guidance includes the use of the ~$325M net distribution in connection with the Engility spin-off to redeem $250M of the 6-3/8%

senior subordinated notes and repurchase ~$75M of L-3 shares.

(4) The 2011 amounts (excluding Engility), represent L-3's preliminary results from continuing operations and exclude a tax benefit of $78M, or $0.74 per

share and non-cash impairment charges of $57M ($50M after taxes), or $0.47 per share.


2012 Segment Guidance (Excluding Engility)

Midpoint MidpointSales Margin

Growth Operating ChangeSegment Net Sales vs. 2011 Margin vs. 2011

(bps)

C3ISR $3,500 to $3,600 2% 10.2% to 10.4% -100

Electronic Systems $5,650 to $5,750 1% 12.1% to 12.3% -60

AM&M $2,400 to $2,500 0% 8.5% to 8.7% -80

NSS $1,300 to $1,400 -16% 6.6% to 6.8% +70

Consolidated $12,950 to $13,150 -1% 10.3% -70

($ in Millions)

Notes: (1) Higher pension expense for 2012 vs. 2011 is estimated to reduce 2012 operating income by $39M, consolidated margin by 30 bps,

C3ISR by 70 bps, AM&M by 40 bps and Electronic Systems by 10 bps.

(2) Upon the completion of the spin-off of Engility, L-3 renamed the Government Services segment National Security Solutions (NSS).

(3) Segment guidance excludes the estimated results of the Engility business and estimated spin-off transaction expenses which will

be represented as discontinued operations beginning with 3Q12.

(4) 2011 excludes a goodwill impairment charge of $43M.


27%

15%

7%

51%

27%

19%

10%

44%

Segment Mix Trends: 2012 vs. 2011

24%

16%

24%

36%

Net Sales Net Sales

C3ISR

Electronic

Systems

AM&M

Gov't Svcs

C3ISR

Electronic

Systems

AM&M

NSS

Segment Operating Income Segment Operating Income

C3ISR

Electronic

Systems

AM&M

NSS

25%

14%

17%

44%

C3ISR

Electronic

Systems

AM&M

Gov't

Svcs

* Based on 2012 Segment Guidance Midpoints (July 26, 2012), which exclude Engility (spin-off completed July 17, 2012).

2011 Actual (incl. Engility) 2012 Guidance Midpoints*

($ in Millions)


Cash Flow Data


Cash Flow

2012Including Egility Guidance

2Q12 2Q11 1H12 1H11 ExcludingActual Actual Actual Actual Engility

Net income 208$ 246$ 411$ 453$ 765$

Impairment charges - - - - -

Depreciation & amortization 60 64 119 123 230

Deferred income taxes 20 30 40 56 60

401K common stock match 37 38 75 78 117

Stock-based employee compensation 16 19 33 34 57

Working capital/other items (70) (98) (270) (225) 11

Capital expenditures, net (48) (43) (75) (77) (195)

Free cash flow 223$ 256$ 333$ 442$ 1,045$

($ in Millions)

Robust Cash Flow

Note: See Reconciliation of GAAP to Non-GAAP Measurements.


Supplemental Cash Flow Data

2012Including Engility Guidance

2Q12 2Q11 1H12 1H11 ExcluldingActual Actual Actual Actual Engility

Cash interest payments 53$ 60$ 101$ 122$ 199$

Income tax payments, net 127 140 152 175 330

FAS pension expense 43 39 89 79 179

CAS pension cost 31 32 63 65 126

Pension contributions 32 27 91 89 174

(1)

(2)

(3)

($ in Millions)

Notes: (1) FAS pension expense represents pension expense determined using U.S. GAAP and is based on a 5.02% discount rate (vs. 5.57%

at 12/31/11) and a 2011 actual pension asset return of 3.6% vs. 8.55% (2011 assumption).

(2) CAS pension cost represents estimated allowable and reimbursable pension cost under U.S. Government procurement

regulations (determined using Cost Accounting Standards or CAS) on L-3's U.S. Government contracts.

(3) Estimated 2012 Pension Expense Sensitivity: A 1% increase/decrease in 2012 pension asset return would decrease/increase 2012

pension expense by $3M and the 12/31/11 unfunded obligation by $17M. A 25 bps increase/decrease in the 12/31/11 discount rate

would decrease/increase 2012 pension expense by $12M and decrease/increase the 12/31/11 unfunded obligation by ~$90M.


Cash Sources and Uses, and

Capitalization and Leverage


Cash Sources and Uses

($ in Millions)

1H12 2Q12Actual Actual

Beginning cash 764$ 493$

Free Cash Flow 333 223

Dividends (98) (49)

Share repurchases (315) (177)

Acquisitions, net (216) (11)

Debt repayments, net - -

Other, net 13 2

Ending cash 481$ 481$

Note: See Reconciliation of GAAP to Non-GAAP measurements.

Disciplined and balanced capital allocation


Cash Sources and Uses

($ in Millions) 2012

Guidance

Beginning cash 764$

Free Cash Flow (continuing operations) 1,045

Net cash from discontinued operations 75

Engility spin dividend, gross 335

Dividends (192)

Share repurchases (875)

Acquisitions, net (216)

Debt repayments, net (500)

Other, net 24

Ending cash 460$

Notes: (1) 2012 Guidance reflects the spin-off of Engility on July 17, 2012 and the inclusion of the results of the Engility business through

July 17, 2012 as discontinued operations.

(2) 2012 Guidance does not include the acquisition of Thales Training & Simulation Ltd (purchase price is £83M), which is expected

to be completed in the 2012 third quarter.

(3) See Reconciliation of GAAP to Non-GAAP measurements.

Disciplined and balanced capital allocation


Capitalization and Leverage

Note: Equity includes non-controlling interests (minority interests) of $89M as of June 29, 2012 and December 31, 2011.

($ in Millions)

6/29/12

Actual

Cash $481

Debt $4,126

Equity 6,860

Invested Capital $10,986

Debt/Invested Capital 37.6%

Bank Leverage Ratio 1.96x

Available Revolver $996


Appendix


Debt Balances and Maturities

($ in Millions)

Notes: (1) The contingent convertible notes (CODES) contain "puts" that holders can exercise on Feb 1, 2016, and every 5-year

anniversary thereafter at a price of 100%. Current conversion price $95.46 (subject to adjustment effective August 1, 2012 for

Engility spin-off).

(2) $250M of the 6-3/8% Sub. Notes were redeemed on July 26, 2012.

(3) T = comparable U.S. treasury note rate.

6/29/12 Maturity RedemptionActual Type Date Premium

Senior:

Revolver -$ L+150 bpts 2/3/17 n.a.

3.95% Senior Notes 500 fixed 11/15/16 T+0.50% make-whole

5.2% Senior Notes 1,000 fixed 10/15/19 T+0.30% make-whole



Subordinated:

6-3/8% Notes 500 fixed 10/15/15 2.125%

3% CODES 689 fixed 8/1/35 0%

Unamortized Discounts (13)

Total 4,126$


Supplemental Segment Data

Previous Presentation Reclassification Revised Presentation

2011 1H11 2Q11 2011 1H11 2Q11 2011 1H11 2Q11

Sales:

C3ISR 3,568$ 1,630$ 845$ (88)$ (38)$ (19)$ 3,480$ 1,592$ 826$

Electronic Systems 5,540 2,649 1,373 88 38 19 5,628 2,687 1,392

AM&M 2,440 1,203 610 - - - 2,440 1,203 610

Gov't Services 3,621 1,885 938 - - - 3,621 1,885 938

Consolidated 15,169$ 7,367$ 3,766$ -$ -$ -$ 15,169$ 7,367$ 3,766$

Operating Margin:

C3ISR 11.5% 11.3% 11.3% 11.5% 11.7% 11.4%

Electronic Systems 13.0% 13.0% 13.3% 13.0% 12.8% 13.2%

AM&M 9.5% 10.1% 9.2% 9.5% 10.1% 9.2%

Gov't Services 7.7% 7.5% 7.5% 7.7% 7.5% 7.5%

Consolidated 10.9% 10.8% 10.7% 10.9% 10.8% 10.7%

($ in Millions)

Note: 2011 excludes non-cash goodwill impairment charge of $43M.


Reconciliation of GAAP to Non-GAAP Measurements

1H12 2Q12 1H11 2Q11

Actual Actual Actual Actual

Operating income 724$ 367$

Add: Spin-off transaction expenses 13 7

Goodwill impairment charge - -

Segment operating income 737$ 374$

Net cash from operating activities 408$ 271$ 519$ 299$

Less:Capital expenditures (76) (49) (78) (43)

Add: Dispositions of property, plant and equipment 1 1 1 -

Free cash flow 333$ 223$ 442$ 256$

($ in Millions)


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Second Quarter Earnings Call - L3 Technologies · 2018. 6. 27. · 2Q12 Earnings Call | July 26,...

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